Everything You Need to Know About Promissory Note

What Is a Promissory Note?

A Promissory Note is a formal legal agreement in which one party (the borrower) promises in writing to repay a specific amount of money to another party (the lender) under clearly defined terms. It sets out the loan’s principal, interest rate, repayment schedule, and any penalties for late payment or default. Promissory Notes are commonly used in both personal and business lending, serving as legally enforceable proof of debt.

Who Should Use a Promissory Note?

Promissory Notes are suitable for:

• Individuals lending or borrowing money privately (friends, family, or partners)
• Businesses offering financing or extending credit to clients
• Investors providing personal loans or startup capital
• Real estate transactions, equipment leasing, or secured lending arrangements

Key Details Included in a Promissory Note

A comprehensive Promissory Note typically includes:

• Principal amount - total money borrowed
• Interest rate - fixed or variable rate applied to the loan
• Repayment schedule - frequency and duration of payments
• Collateral - any property or asset pledged as security
• Late fees and penalties - charges for missed or delayed payments
• Default terms - what happens if the borrower fails to pay
• Governing law - which state’s law applies to the agreement

Why a Promissory Note Matters

This document serves as protection for both sides. For the lender, it provides legal recourse to recover the loan if the borrower defaults. For the borrower, it clearly defines the terms and avoids disputes over repayment expectations. It also serves as a transparent record for tax or business accounting purposes.